Big Cap Stocks: Very long-term investment plans 5-10-98

DonScott

JACKSON, Miss. (CBS.MW) -- When looking for large-cap growth stocks, keep an eye out for above-average earnings growth, quality balance sheets, and a very long-term outlook.

It's not rocket science, but it works for Ron Lindquist, manager of the DG Equity Fund (DGEFX)
DGEFX, +0.19%
out of Jackson, Miss. And he's doing much better than the market no matter how you slice it.

Going into this week, he's up 7.7 percent year to date, better than twice the S&P 500
SPX, +0.04%
's 3.3 percent.

Even sweeter, his annualized return has beaten the market, according to Morningstar's Principia Pro database, over the last 5-years, 3-years, and 12 months, through the end of August. Only 10 other growth-fund portfolio mangers, or manager-teams, can make that claim.

Stringent tests Lindquist chooses his investments from among those stocks with market caps in excess of $1 billion. His $700 million portfolio holds 55 companies and they must meet stringent tests with respect to earnings growth rates, relative price-earnings ratios, capitalization structure, balance sheet quality, and return on equity. They must also be leaders in their industries.

Running portfolios this way since 1978, Lindquist says it's most important to find companies with consistent earnings- per-share growth rates. He wants to see a rate that's 50 percent better than the S&P 500.

He says the last five years have been "atypical," with the S&P posting average annual EPS growth rates as high as 15 percent. More typical, he says, is 5.5 to 7 percent, the average being a little over 6 percent.

"So we would expect our companies earnings per share growth rate to be at least at the 9 to 10 percent rate for long periods of time," says Lindquist, who will pay more if that earnings stream is extremely consistent.

How much more? "Typically for growth stocks that we buy, the relative PE multiple runs between 110 and 140 percent of the S&P 500 multiple over long periods of time," he explains.

Another way he judges the caliber of a company's financial strength is to look at Valueline's financial strength rating. His portfolio comes in with an average of A+, one notch down from the top. The S&P 500 average: A.

When it comes to capitalization, this 57-year old manager doesn't like to see too much debt. On average, his companies shine with 80 per cent equity, 20 percent debt. He notes the average for the S&P 500 is 55 to 60 percent equity, the rest debt.

"If a great financial stress comes into the economy, and there's no way we can predict that, and it persists for some time, there's far less chance of the ultimate bankruptcy of these companies if the quality of the balance sheet and the company, in general, is at the highest level," he said. Very long term

When it comes to return on equity, Lindquist looks for 13 to 14 percent.

DG Equity is 97 percent invested in stocks. And Lindquist is a very, very long-term investor. Of his top ten holdings, he says he's owned some for 20 years. The shortest amount of time he's ever held a stock was between 2 and 3 years.

"I'd prefer to average up on cost rather than average down." And where would he put money to work right now? "I think General Electric (GE)
GE, +1.35%
has pulled back to levels that might be, even on the short term, more attractive, than when it was trading well up into the nineties," he says without hesitation, thanks to his expectation of continued 12 to 14 percent EPS growth. Second choice: Automatic Data Processing (AUD)
AUD, -9.39%
. "The beauty of Automatic Data is not only does it deliver earnings per share growth rates of very nearly 12 to 14 percent, but it does so consistently, nearly persistently, almost year in and year out." His third choice would be Pitney Bowes (PBI)
PBI, +0.49%
, slightly less consistent, but which he still expects to continue to report 12 to 13 percent annual EPS growth.

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